Fee-based practices in the financial services industry remain a sensitive issue but, with the improved professionalism of the industry, independent financial advisors are becoming more comfortable with charging fees for their expertise, advice and service
As operational costs increase and advisors have to contend with additional expenses, such as compliance, annual auditing, reporting to the FSB and PI insurance, finding the optimal income model is becoming crucial to ensure long-term business sustainability in a financial advisory practice.
Between black and white
Whether your selected model is fee-based or commission-based, or combines income from various sources, it should suit you, your practice and your clients.
The traditional model of earning income through commission remains the most popular model. Of the Masthead members who have had Practice Valuations done, 92% earn remuneration through commission and trail fees.
Among those practices, 60% earn income from recurring commission including fees, while the other 40% receive remuneration from upfront commission.
The statistics also show that 62% of these practices charge fees for services. This highlights the growing trend for advisors to supplement their income with an ongoing annual or monthly administration/advice fee on investments under administration.
What’s best for the client?
There are pros and cons to earning revenue from both a fee- and commission-based model.
Those who favour a pure fee-based model argue that clients receive truly objective advice as they have no commission incentives. Furthermore, they believe clients prefer the easily understood and transparent pricing model of a rate per hour or per task.
However, charging for services in this manner may not necessarily offer the best value to the client – or the advisor – over the long term. The client pays only for the time spent with the advisor, or while the advisor performs a service for the client. This may not be the full extent of the advisor-client relationship.
Fee-based is not failsafe
If the client requires monitoring and administration services, time-based fees could be difficult to accurately allocate and time-based charges could become far more costly over the long term. Furthermore, the advisor has little incentive to encourage the client to purchase any financial product, even where delayed decisions or unfulfilled actions may have significant long-term financial, tax or estate planning implications for the client.
A disadvantage for the advisor is that time or transactional based fees may not fully reimburse or incentivise the advisor, support the practice’s service delivery, the client’s service level expectations or the costs of compliance.
With little or no succession value retained, a practice that applies a pure fee-based model is likely to cease to exist when the advisor exits the practice.
Joint decision
Once it is accepted that advice and service have value, the advisor and client can then agree on an appropriate level of remuneration and how that remuneration is to be paid.
Diversified income streams
The old adage ‘don’t put all your eggs in one basket’ holds much truth. The best policy for business sustainability may be a remuneration model with diverse income streams. This further enables an advisor to offer various types of products and services to clients, creating the convenient ‘one-stop-shop’.
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